The Intelligent Investor

“Most people who trade in the market lose money at it the end,” said Benjamin Graham, the American stock-market trader turned academic who wrote The Intelligent Investor, regarded by ace investor Warren Buffet as the best book on investment ever. But why is it that nearly 40 years after Graham’s death his advice is still so relevant?

Scarred by childhood poverty, burnt by the 1929 Wall Street Crash and waiting until 1954 for share prices to climb back up again, cautious Graham believed that few investors could profit from the risky practice of speculating and hopefully outperforming the market.

For most the stock market was an expensive form of gambling. Avoiding losses, which are difficult to regain, is the bedrock of Graham’s philosophy.

Frankly Graham’s approach of ignoring the hype of the stock market, not racing to buy shares on the up, rarely selling sliding shares and not having unreasonable profit expectations was boring.

Although The Intelligent Investor is a fairly stodgy read, somewhat antiquated by its talk of railway stocks, it is livened up by Graham’s personification of rollercoaster markets as schizophrenic Mr Market, eager to buy one day as a share price rockets, desperate to sell the next.

Shares should be bought at two thirds of their market value Graham advises. But how do you know what their true value is? Investors should consider and value a share as if they were going to buy the entire company.

A company should be of sufficient size, with a 2:1 current asset ratio, consistently paying dividends for 20 years, with 33% earnings per share growth over the last decade and a sound margin of safety from assets comfortably exceeding debt. Hang on to your calculator as Graham provides plenty more formulae to plug in.

So Graham’s Intelligent Investor has some accountancy experience, good mathematical skills and the time to thoroughly research each share purchase. The good news is that the internet makes such information available within seconds. The bad news is that global, conglomerate businesses dealing in new technologies and emerging markets are far more difficult to understand than Graham’s core industries of cars, manufacturers, railways and utilities.

Always invest in large solid businesses that you understand is one of Graham’s fundamental commandments. Following that recommendation you would never have purchased lucrative Apple shares back in the 1980s but if you had bought them you would have been grateful for Graham’s insistence on standing by your stock and not selling.

“You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right,” says Graham.

Then again Volkswagen, a good old fashioned car manufacturing business of considerable size and an impeccable financial track record, would be a dead cert on Graham’s system. Given time VW shares may prove to be a good example of the type of cut-price share that Graham would have bought.

Graham’s philosophy may seem boring and dated at times but timelessly he understands humans as investors who allow emotions to mislead them into poor decisions. Investors with business experience, time to research, a modicum of hard-headed emotional maturity and funds to invest for a decade or two are well-placed to take moderate dividends from the market inefficiencies that Graham teaches them to identify.